The Indian economy has been growing ever since liberalization kicked in 1991.
As Prime Minister Manmohan Singh (then the Finance Minister) opened up the closed market; international trade and foreign investments increased.
Privatization of many government held and operated sectors, improved tax policies and advanced monetary policies set the growth engine in motion.
Today, 10 years after the reforms, the Indian economy is booming largely due to the exponential growth of the service sector.
Sadly agriculture and farming have lost their charm and today India is net importer of many essential food products including rice.
However, inflation has caught-up with every aspect of life.
Basic necessities such as food, shelter, oil and gas are driven by demand and supply.
Naturally the challenge the Indian economy faces has changed and threatens to increase the economic divide between the rich and the poor.
With a historically strong educational foundation, the financial system has come to become quite robust, and in fact comparable to the most sophisticated American and European system.
The Reserve Bank of India (more commonly referred to as RBI) monitors and implements the monetary policies in the country.
They make sure the inflation levels stay within acceptable levels.
Like most other central banks around the world, the RBI lends money to other banks in the country enabling them to meet the needs of withdrawal demands from the bank's clients/depositors.
The interest rate that the RBI charges these banks is called the repo rate and helps them control the amount of money the banks will borrow.
In addition the RBI also mandates that all commercial banks maintain a minimum amount of cash reserves with the RBI.
This in combination with the repo rate is used to control the amount of liquidity in the market, which indirectly controls the inflation rate.
A higher repo rate and cash reserve requirement reduces the amount of money banks lend to customers, which reduces cash flow in the local economy which results in lower demand for goods and services resulting in lower prices for most essential goods that affect inflation levels.
In January 2011 RBI increased the short-term interest rates by 25 basis points or 0.
25% to control growing concerns over food inflation.
The repo rate was increased to 6.
5%, but the cash reserve limits were not altered.
Despite these changes forward looking inflation has been revised from a low of 5.
5% to 7%.
This will mean that the common man in India will have to still pay much higher prices than he is used to in the days to come.
As Prime Minister Manmohan Singh (then the Finance Minister) opened up the closed market; international trade and foreign investments increased.
Privatization of many government held and operated sectors, improved tax policies and advanced monetary policies set the growth engine in motion.
Today, 10 years after the reforms, the Indian economy is booming largely due to the exponential growth of the service sector.
Sadly agriculture and farming have lost their charm and today India is net importer of many essential food products including rice.
However, inflation has caught-up with every aspect of life.
Basic necessities such as food, shelter, oil and gas are driven by demand and supply.
Naturally the challenge the Indian economy faces has changed and threatens to increase the economic divide between the rich and the poor.
With a historically strong educational foundation, the financial system has come to become quite robust, and in fact comparable to the most sophisticated American and European system.
The Reserve Bank of India (more commonly referred to as RBI) monitors and implements the monetary policies in the country.
They make sure the inflation levels stay within acceptable levels.
Like most other central banks around the world, the RBI lends money to other banks in the country enabling them to meet the needs of withdrawal demands from the bank's clients/depositors.
The interest rate that the RBI charges these banks is called the repo rate and helps them control the amount of money the banks will borrow.
In addition the RBI also mandates that all commercial banks maintain a minimum amount of cash reserves with the RBI.
This in combination with the repo rate is used to control the amount of liquidity in the market, which indirectly controls the inflation rate.
A higher repo rate and cash reserve requirement reduces the amount of money banks lend to customers, which reduces cash flow in the local economy which results in lower demand for goods and services resulting in lower prices for most essential goods that affect inflation levels.
In January 2011 RBI increased the short-term interest rates by 25 basis points or 0.
25% to control growing concerns over food inflation.
The repo rate was increased to 6.
5%, but the cash reserve limits were not altered.
Despite these changes forward looking inflation has been revised from a low of 5.
5% to 7%.
This will mean that the common man in India will have to still pay much higher prices than he is used to in the days to come.
Source...